Per our earlier article on A Merger & Acquisition Leader’s Playbook For Success, avoid the traps of 1) poor strategic focus, 2) poor cultural integration and/or 3) poor delivery of synergies by leveraging the full playbook and its seven sub-playbooks: Strategic, commercial, operational, financial, governance, organizational, change management.
This article focuses on The Governance Playbook and its components of regulatory, financial governance and the board.
Consider the Gore-Tex waterline analogy. They’re happy with people taking risks that could result in a hit above the waterline. They can fix those. They are inconsequential and reversible. But if someone takes a risk that could sink the boat—consequential and irreversible—they need to escalate that decision.
Violating some regulations result in minor fines. Fine. Violating some regulations result in regulators taking away your license to operate. Not fine.
Other key considerations as you evaluate a business for a mergers and acquisitions (M&A) or private equity (PE) deal is brand reputation and emerging regulatory trends. Among other things, pay attention to: business compliance, licensing, insurance, permits, legal and environmental issues and risks, pricing and foreign operations.
On the other hand, financial governance is always necessary. Where your regulatory governance needs merely to secure your license to play, deploy a zero-tolerance approach to financial governance. Require complete integrity and compliance.
Every one of you knows a story of some executive that used their best judgment in recognizing some revenue in some period that others might not have recognized to deliver on their commitments. Every one of you knows a story of how that executive ended up causing severe reputational damage to themselves and their company when they did it again and again and again until they get caught.
Don’t do it. Don’t let anyone else do it. Own the miss. Take the short-term hit. Fix the problem. Recover. Move on.
Keep a close watch on all the financial items you looked at during due diligence.
Look at the following from the perspective of regulators:
- Business structure and operations
- Products and intellectual property
- Customer information
- Employee information
- Infrastructure, physical assets, and real estate
Boards play multiple roles: part governance, and part advisory. Building the right board can make a massive impact on the success of a merger or acquisition.
In general, boards are accountable for governance and oversight. They approve strategic, annual operating (profit and loss [P&L], cash flows, balance sheet), future capability, succession, contingency, and compensation plans and are consulted and informed on everything else.
Mergers and acquisitions are board level issues. Board governance and oversight of mergers and acquisitions should extend well beyond the go-no go decision to providing governance and oversight of the most important integration efforts.
- Air cover: Dealing with some owners and stakeholders to free up the chief executive officer’s (CEO) time
- Accountable for governance and oversight on behalf of owners and stakeholders. Noses in—especially through audit committee interacting directly with the chief financial officer [CFO] and so forth.
- Approves strategic, annual operating P&L, cash flows, balance sheet), future capability, succession, contingency, and compensation plans.
- Consulted and informed on everything else. Hands out.
- Hire and fire the CEO
- Evaluate, compensate, and develop the CEO and their leadership team
- Accountable for strategic, operating, organization plans and results, culture
Chair accountable for board management
- Operations (committees) and board organization
CEO responsible for board management
- Prepare and brief in advance, manage meetings, follow-up
- Manage board, group, one-on-one, board two-step: (1) test or consult; (2) sell
Some private equity firms support their portfolio companies in increasing value by providing:
- Perspective on customers, collaborators including community leaders, competitors, and conditions to drive organic growth.
- Connecting company leaders with potential customers and collaborators.
- Increased leverage in mergers and acquisitions to drive inorganic growth
- Perspective and resources to strengthen company infrastructure, including human capital and management team, technical and information technology, new product development, financial infrastructure for reporting, and managing cash flows.
- Review commercial competitiveness of the business and advise on the strategic and operating plans.